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Federal Deposit Insurance Corporation v. Giancola

United States District Court, N.D. Illinois, Eastern Division

March 19, 2014

FEDERAL DEPOSIT INSURANCE CORPORATION AS RECEIVER FOR MIDWEST BANK AND TRUST COMPANY, Plaintiff,
v.
JAMES J. GIANCOLA; JEROME JAY FRITZ a/k/a J.J. FRITZ; ANGELO A. DIPAOLO; BARRY I. FORRESTER; ROBERT J. GENETSKI; GERALD F. HARTLEY; HOMER J. LIVINGSTON, JR.; JOSEPH R. RIZZA; EGIDIO
v.
SILVERI a/k/a E
v.
SILVERI; LEON WOLIN; THOMAS A. CARAVELLO; SHELDON BERNSTEIN; THOMAS H. HACKETT; MARY M. HENTHORN; KELLY J. O'KEEFFE; BROGAN M. PTACIN; JOHN S. SPEAR; and WILLIAM H. STOLL, Defendants.

MEMORANDUM OPINION & ORDER

JOAN B. GOTTSCHALL, District Judge.

The FDIC has sued the former officers and directors of Midwest Bank and Trust Company ("Midwest"), alleging that their gross negligence caused the bank to lose $62 million in unpaid loans and $66 million in preferred stock that the bank held in mortgage lenders Fannie Mae and Freddie Mac. The defendants have moved to dismiss the complaint, arguing that their decisions to approve the loans and retain the stock are shielded by the business judgment rule. Five other judges in this district have rejected this argument in cases involving substantially similar allegations. Those judges have held that where the FDIC alleges that the defendants failed to obtain necessary information to make rational business decisions, the business judgment rule does not warrant dismissal. Because the FDIC has alleged that was the case here, the motion to dismiss is denied.

I. BACKGROUND

Midwest was an Illinois-chartered bank based in Elmwood Park, Illinois. It was a member of the Federal Reserve System, and its deposits were insured by the FDIC. In 2003, state regulators investigated the bank and found that its risk management practices were inadequate given the size and risk profile of the bank. The regulators warned that the bank was vulnerable to a slowdown of the economy and ordered the bank to adopt new lending policies. The FDIC alleges that Defendants adopted such policies but failed to adhere to them when they approved certain risky loans.

Specifically, the FDIC challenges loans that the bank made to six borrowers from 2005 to 2008. The FDIC alleges that Defendants disregarded the bank's own policies in approving these loans by failing to ensure the borrowers' ability to repay, disregarding evidence of the borrowers' financial weakness, and structuring loans with terms that were unreasonably generous to the borrowers. The FDIC alleges that Defendants' approval of loans to these borrowers constituted gross negligence.

In addition to the loan challenges, the FDIC also challenges Defendants' decision to retain certain preferred stock in mortgage lenders Fannie Mae and Freddie Mac. Though many banks held securities in these companies, the FDIC alleges that Midwest held them in an unusually high concentration. The FDIC alleges that, under the bank's own policies, Defendants were required to sell these securities because they could not justifiably have been expected to return to their "basis value"-the price at which the bank purchased them. Defendants nevertheless decided to retain the securities, and the bank lost over $66 million when they became practically worthless. Again, the FDIC alleges that Defendants' decision to retain these securities constituted gross negligence.

On May 14, 2010, the Illinois Department of Financial and Professional Regulation ("IDFPR") closed Midwest, and the FDIC was appointed receiver. As receiver, the FDIC succeeded to any rights of the bank's stockholders, depositors, accountholders, and other creditors. The FDIC filed this suit on April 30, 2013.

II. LEGAL STANDARD

To survive a motion to dismiss pursuant to Rule 12(b)(6), a complaint must "state a claim to relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim satisfies this pleading standard when its factual allegations "raise a right to relief above the speculative level." Twombly, 550 U.S. at 555-56; see also Swanson v. Citibank, N.A., 614 F.3d 400, 404 (7th Cir. 2010) ("[P]laintiff must give enough details about the subject-matter of the case to present a story that holds together."). For purposes of the motion to dismiss, the court takes all facts alleged by the claimant as true and draws all reasonable inferences from those facts in the claimant's favor, although conclusory allegations are not entitled to this presumption of truth. Virnich v. Vorwald, 664 F.3d 206, 212 (7th Cir. 2011).

III. ANALYSIS

Five other judges in this district have considered motions to dismiss in cases brought by the FDIC involving substantially similar allegations. See FDIC v. Elmore, No. 13 C 1767, 2013 WL 6185236 (N.D. Ill. Nov. 22, 2013) (St. Eve, J.); FDIC v. Pantazelos, No. 13 C 2246, 2013 WL 4734010 (N.D. Ill. Sept. 3, 2013) (St. Eve, J.); FDIC v. Giannoulias, 918 F.Supp.2d 768 (N.D. Ill. 2013) (Grady, J.); FDIC v. Mahajan, No. 11 C 7590, 2012 WL 3061852 (N.D. Ill. July 26, 2012) (Kendall, J.); FDIC v. Spangler, 836 F.Supp.2d 778 (N.D. Ill. 2011) (Dow, J.); FDIC v. Saphir, No. 10 C 7009, 2011 WL 3876918 (N.D. Ill. Sept. 1, 2011) (Pallmeyer, J.). The court's analysis in this case is guided by these recent decisions.

A. Consideration of Documents Attached to the Motions to Dismiss

As an initial matter, the court must determine which materials it should consider in deciding the motion to dismiss. Defendants have attached numerous exhibits to their motion, including minutes of meetings of the Board of Directors, internal memoranda, and reports of regulators regarding the bank's exposure to risk. Defendants argue that these documents demonstrate that the FDIC's allegations are false. For example, they point to a 2010 report in which the Federal Reserve Bank of Chicago found that the bank's procedures for assessing risk were fundamentally sound. The FDIC argues that the court may not consider these exhibits because they are outside the scope of the complaint.

Generally, matters outside the complaint may not be considered on a motion to dismiss. Venture Assocs. Corp. v. Zenith Data Sys. Corp., 987 F.2d 429, 431 (7th Cir. 1993). An exception to this rule is that the court may consider "documents that are critical to the complaint and referred to in it." Geinosky v. City of Chi., 675 F.3d 743, 745 n.1 (7th Cir. 2012). The Seventh Circuit has stated that this "is a narrow exception aimed at cases interpreting, for example, a contract." Levenstein v. Salafsky, 164 F.3d 345, 347 (7th Cir. 1998). The documents that Defendants have asked the court to consider, however, are more akin to exhibits typically submitted in connection with a motion for summary judgment. They are lengthy, complex materials that contain a great deal of information, some of which is helpful to the FDIC, and some of which is helpful to Defendants. It is not appropriate for the court at this stage of the case to interpret these ...


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